by Pinchas Cohen
Key Events
Of late, stocks have been a bit of a juggernaut, regularly hitting fresh highs on positive earnings reports and reawakened investor faith in President Donald Trump’s ability to get tax reform done, after his budget was approved by the US Senate.
But as the very public fracas between Trump and Republican Senators Bob Corker and Jeff Flake heats up—both are very openly critical of the President's ability to do his job—the much anticipated tax impetus that has been driving stocks to dizzying new heights is now in question. Without their votes, as well as that of John McCain who has been skeptical of Trump for longer, tax reform could become a lot harder to pass.
As well, weak corporate earnings results from Chipotle (NYSE:CMG) and Advanced Micro Devices (NASDAQ:AMD), which both reported earlier this week, resulted in selloffs.
Global Financial Affairs
Among the 10 sub-indices of the S&P 500, the one best positioned to rally right now is the Real Estate sector.
While Housing Starts stumbled in September, the purchase of single-family homes is on the rise. That’s a sign of economic recovery, as more families living in apartments, which are generally rented, can afford to move into their own homes, which are generally purchased. Houses also require additional labor to construct, contributing more to job growth and thus economic expansion.
The Real Estate sector also acts as a potential hedge against inflation, because of the tendency for rents and property values to increase when inflation pushes higher. As the Fed becomes increasingly more confident of rising inflation, investors are likely to seek out real estate, if only for its hedging possibilities.
The Real Estate Select Sector SPDR ETF (NYSE:XLRE) has been trading within a rising channel ever since Trump won the election and animal spirits reawakened. While the S&P 500 fell 0.47 percent yesterday, led by a 0.99 percent decline in Industrials, Real Estate, although not a defensive sector but rather cyclical, (goes up when the economy is growing and down when the economy is shrinking, much like Industrials), fell only 0.25 percent, the second smallest decline behind just the Health Care sector, which is noteworthy considering that's a defensive sector.
Elsewhere, the BOC, Canada's central bank, put rates on hold amid weak inflation and the possible collapse of the North American Free Trade Agreement (NAFTA) negotiations. The Loonie is sold off, forming a bottom reversal for the USDCAD pair.
On October 20, the USDCAD broke the downtrend line since May and yesterday registered not just a higher price than the former, August peak, but also a close above the former peak’s high, completing the required minimum series of two peaks and troughs in an upward direction. Now we can officially call it an uptrend.
Yesterday, better than expected, accelerated UK growth spurred rate hike bets, pushing sterling and Britain’s 10-year yield higher. The sovereign bond gained five basis points, its highest in nine months.
This morning, stock trading opened in Asia with a wait-and-see approach. South Korea's KOSPI under-performed regional peers, which was surprising considering the country's economy accelerated more quickly than expected during the third quarter.
European traders seemed to take their cues from Asia, as shares remained flat after gains in mining and household goods stocks were offset by losses in banking sector shares, driven by disappointing corporate results from Deutsche Bank AG (DE:DBKGn) and Barclays (LON:BARC). Spain's IBEX 35 pared half of yesterday’s losses ahead of a speech by Catalonia’s President Carles Puigdemont to the regional parliament.
The dollar advanced slightly, even as the euro, its most significant currency trade partner, maintained yesterday’s gains. US sovereign bonds along with euro area bonds were steady, after Treasury yields yesterday climbed to a seven-month high, ahead of the ECB's policy meeting today. As well, global markets await the announcement of the next Fed boss sometime before November 3.
In today's most anticipated scheduled event, the ECB is expected to reduce the size of its monthly bond buying. Markets expect the ECB to extend its QE program by 30 billion euros a month, over the next nine months. This QE reduction, with hawkish forward guidance, is what analysts and traders want to hear.
Still, ECB President Mario Draghi has to maintain a delicate balance. He doesn't want the euro to strengthen further, which would make euro-area exports less competitive, dampening the eurozone growth that's been a decade in the making. Should Draghi disappoint consensus, it might be the catalyst for the final decline needed for an official reversal of the single currency against the dollar.
Up Ahead
- Japan updates on CPI tomorrow.
- It's Super Thursday for US earnings. Among today's announcements: Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Twitter (NYSE:TWTR)) and Intel (NASDAQ:INTC) all, except for Twitter, report after the US close.
- Tomorrow's U.S. GDP release is expected to show that the economy probably expanded at about a 2.5 percent annualized pace in the third quarter, restrained in part by the effects of two hurricanes.
Market Moves
Stocks
- The Stoxx Europe 600 Index fell 0.2 percent as of 8:23 a.m. in London.
- The MSCI All-Country World Index fell less than 0.05 percent.
- The U.K.’s FTSE 100 fell less than 0.05 percent to the lowest in more than three weeks.
- S&P 500 Futures dipped less than 0.05 percent to their lowest in more than a week.
Currencies
- The Dollar Index is up 0.8 percent, at the height of its day.
- The euro climbed 0.1 percent to $1.1826, the strongest in a week.
- South Africa’s rand fell 1 percent to 14.1931 per dollar, its weakest level in 11 months, amid expectations of a downgrade after the country’s finance minister on Wednesday signaled more borrowing.
Bonds
- The yield on 10-year Treasuries climbed less than one basis point to 2.44 percent, the highest in about seven months.
- Germany’s 10-year yield advanced less than one basis point to 0.48 percent, the highest in 12 weeks.
Commodities
- WTI crude oil dipped 0.3 percent to $52.04 a barrel.
- Gold advanced 0.2 percent to $1,279.79 an ounce, the largest gain in a week.
- Copper decreased 0.2 percent to $6,997.00 per metric ton.